There May Be Underlying Issues With The Quality Of Beijing Waluer Information Technology's (SZSE:301380) Earnings

Despite posting some strong earnings, the market for Beijing Waluer Information Technology Co., Ltd.'s (SZSE:301380) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Beijing Waluer Information Technology

A Closer Look At Beijing Waluer Information Technology's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2024, Beijing Waluer Information Technology had an accrual ratio of 0.74. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥286m, in contrast to the aforementioned profit of CN¥62.7m. It's worth noting that Beijing Waluer Information Technology generated positive FCF of CN¥6.5m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Waluer Information Technology.

Our Take On Beijing Waluer Information Technology's Profit Performance

As we discussed above, we think Beijing Waluer Information Technology's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Beijing Waluer Information Technology's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 50% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Beijing Waluer Information Technology, you'd also look into what risks it is currently facing. For example, we've found that Beijing Waluer Information Technology has 4 warning signs (2 are potentially serious!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Beijing Waluer Information Technology's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.